FOREX: Dollar Recovery will be Short-Lived without a Meaningful Collapse in Risk

Dollar Recovery will be Short-Lived without a Meaningful Collapse in Risk

For those lingering dollar bulls or long-term fundamentalists, the dollar’s bounce to start the week may be encouraging; but it is hardly confirmation of a new trend. The single currency was merely finding reprieve from last week’s progressive selling momentum in the absence of a meaningful current in underlying speculative trends. If we were to take a look at the Dollar Index, we see that the currency would recover only a quarter of Friday’s losses and would fall well short of even testing former support (around 79.75 or 80) as contemporary resistance. Against some of its more liquid counterparts, the greenback’s strength would look just as feeble. For EURUSD, a test of the magnetic 1.35 level (the midpoint of the November 2009 to June 2010 decline) temporarily rebuffed an unconvincing follow up to Friday’s massive rally. Elsewhere, GBPUSD stalled in its advance for the first time in five trading days, USDJPY posted a slight bullish close for the first time in six active trading sessions and AUDUSD’s progress to two-year-plus highs was in more technicality than conviction. In all likelihood, the dollar’s performance today is a reference to stalled risk appetite trends best characterized by the S&P 500’s slip from four-month highs. On the one hand, this is discouraging because momentum is still pretty convincing behind optimism; but at the same time, this does help reconnect the currency to risk.


The hesitancy on risk trends and the dollar is indisputable; but it is also somewhat remarkable when we consider some of the fundamental developments in the backdrop. For risk appetite trends, the unfavorable growth outlook and potential for near-term European financial troubles should at least raise some concern. Yet, for economic activity, the market has already proven itself adept at ignoring looming downshifts in economic activity, investment and capital flow regardless of how certain it may seem. Therefore, the novel issue Monday was the financial waves from the Euro Zone. Ireland was once again in focus for its ability to cover its Anglo Irish Bank liabilities. This is one of the few situations where one institution can clearly swamp an entire nation’s financial system. The bigger concern though lies a little bit down the road. On Thursday, a round of ECB loans spanning twelve, six and three-month maturities and totaling 225 billion euros will come due. If the banks didn’t have other avenues of raising capital through more opaque means; this could be a concerning event. However, the rollover itself will likely do little to confirm any troubles that lie ahead. Aside from general risk trends, it is further unusual that the dollar would not be put to task for greater volatility given more pervasive developments in market manipulation. Chatter that the Treasury is planning to sell its stake in AIG was soundly offset by the Fed’s sale of $36 billion in two-year government debt. Unchecked though is the growing anger by some policy officials that the world is turning to outright currency manipulation to improve competitiveness in exports. Brazil’s Finance Minister Guido Mantega said there is a “currency war” going on; and that he would buy all “excess dollars” to prevent the real from rallying. Keep an eye on this.


As for scheduled event risk, the docket was relatively light. Yet, it is worth mentioning that the Dallas Fed’s manufacturing report sets a dour precedence for Friday’s ISM report. More interesting the Chicago Fed’s national activity composite for August supported a stalled recovery. Tomorrow’s consumer confidence report, however, has market-moving precedence and a tangible fundamental impact for growth forecasts.


Related: Discuss the Dollar in the DailyFX Forum, John’s Analyst Picks: What Would it Take to Trade EURUSD Near EURUSD?


Euro Faces a Considerable Fundamental Wave as Regional Banks’ ECB Loans Come Due

It is somewhat surprising that the euro is not more responsive to its own fundamental uncertainties. I say somewhat because speculative interests are always selective in what they deem to be pertinent as prevailing winds of risk and reward. Today’s off-docket updates were a good reminder that the future is far from smooth sailing. Financial headlines Monday were dedicated to doubts surrounding Ireland’s financial future. German business paper Handelsblatt quoted an unnamed source that the European Union was considering tapping its bailout fund to save Ireland at one point. Reports like this encouraged Irish Finance Minster Lenihan to deny the country is in such trouble and promise a reassessed cost of Allied Irish bailout by October 1st. What is really concerning going forward though is the coming expiry of ECB loans. More on that later.


British Pound Holds Steady Despite a Drop in Home Prices and IMF Doubts Over Growth

The pound was essentially unmoved Monday against most of its major counterparts. This performance is at once notable and unremarkable. It is noteworthy given housing prices measured by Hometrack marked their biggest drop in 18 months and demand hit a January 2008 low; and the IMF slightly downgraded its growth forecast. And yet, this doesn’t necessarily clarify the mix of rates, financial stability and economic activity.


Japanese Yen may Face a Two Tiered Assault as Rumors of a New Stimulus Program Joins Intervention

We haven’t heard definitive confirmation that Japanese officials were responsible for Friday’s sharp rally in USDJPY, which is probably why the pair immediately reversed said gains. How influential can a back be in its currency manipulation? How effective does the BoJ think it will be? Well, intervention alone may not do it; but early rumors of a 1.6 trillion yen stimulus package could mark a more expansive and lasting plan.


New Zealand Dollar Rapidly Losing its Investment Status as 10 Year Yield Slides Below Australia Return

What is the New Zealand dollar’s role in the FX market? It is not a growth engine; nor do its agricultural commodity exports make it a major trade economy. No, the kiwi’s real value is as an investment currency. Typically, the currency sustains a much higher yield that its counterparts. And yet, today, the 10-year government bond yield for Australia actually overtook its New Zealand counterpart for the first time in two years.


Australian Dollar Scaling Dangerous Heights with Heavy Dependence on Four-Month High Rate Outlook

The Australian dollar is at or near multi-year highs against the US, Canadian, New Zealand dollars, British pound and euro. While relative economic stability and yield support general strength for the commodity currency; at what level is it out of line? This is hard to gauge; and that is why we look for a specific event to trigger a speculative shift. For this currency it will likely be a collapse in rate expectations.